Valuentum Exclusive Analysis for the Discerning Investor

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May 10, 2021

Inflation! How to Think About Value Duration
Image Shown: Longer-duration free cash flow stocks are more impacted by changes in inflationary expectations and interest rates (up or down) than stable and/or stable and growing free cash flow generators. This example shows the impact of falling interest rates (10%-->5%) on stable versus longer-duration hypothetical future free cash flow streams, all else equal (the opposite would directionally be applicable in a rising interest rate environment). There's nothing 'all else equal' in the real world though. In the event of rising inflationary expectations, we would still expect speculative technology stocks to take the biggest hit. On the other hand, we would expect strong and growing free cash flow powerhouses that can price ahead of inflation such as big cap tech to handle the environment well. Though banks, energy, and the metals and mining sectors may lead the market for some time, we still like large cap growth and big cap tech for the long run. What many may be overlooking is that, for those with pricing power, higher inflationary expectations translate into higher product and service prices, too. Big cap tech (and their pricing power) is well-positioned to handle such an environment. We’re not overreacting in any respect, and we’re not going to chase commodity prices or commodity producers higher. Commodity prices are simply too difficult to predict in almost all cases, and banking entities are far too susceptible to boom-and-bust shocks for us to get comfortable with their long-term investment profiles. All in, we’re sticking with companies with strong net cash positions and future expected free cash flows (and solid dividend health, where applicable). Some of the strongest companies that have these characteristics can be found in large cap growth and big cap tech. Facebook remains our top idea for long-term capital appreciation potential. In the meantime, we’re comfortable watching the market chase a rotation into more speculative areas.

May 10, 2021

Utility PPL Is Pursuing a Major Transformation and Has a VBI Rating of 9
Image Source: PPL Corporation – First Quarter of 2021 IR Earnings Presentation. After updating our valuation models for the utility sector, PPL recorded a VBI of 9 and we are keeping a close eye on the firm. Our fair value estimate for PPL sits at $45 per share. As of this writing, shares of PPL yield ~5.8%. The utility’s outlook is bright, and we are excited by its potential upside once the pending transactions with National Grid are complete. In the High Yield Dividend Newsletter portfolio, we include the Utilities Select Sector SPDR Fund ETF (XLU) to gain broad exposure to the space.

May 7, 2021

Dividend Increases/Decreases for the Week May 7
Let's take a look at companies that raised/lowered their dividend this week.

May 6, 2021

3 Strong Dividend Payers to Consider Within Consumer Staples
Image: Kellogg has raised its dividend payout each year since 2005. Image Source: Kellogg. Kellogg, Colgate-Palmolive, and Clorox offer investors solid exposure to the consumer staples space, while showcasing impressive track records with respect to dividend growth. Each has a net debt position, but all three generate traditional free cash flow in excess of cash dividends paid, meaning growth in each of their payouts should be expected. Clorox has the highest Dividend Cushion ratio of 1.6 at this time (Kellogg’s is 0.1, while Colgate-Palmolive’s is 1.4), and as one might expect, Clorox’s dividend growth prospects are the strongest out of this bunch. For example, Clorox raised its annual payout more than 7% during fiscal 2020, while both Kellogg and Colgate-Palmolive have had more modest dividend increases in recent years. Evaluating the cash-based sources of intrinsic value helps one derive a fair value estimate range, as it helps rank dividend health and dividend growth, as shown in this group's respective Dividend Cushion ratios. All things considered, Kellogg, Colgate-Palmolive, and Clorox could be valuable additions to a diversified dividend growth portfolio.

May 5, 2021

Berkshire Hathaway Charging Higher
Image Shown: Shares of Berkshire Hathaway Inc Class B stock are on a nice upward climb year-to-date, and we include BRK.B as an idea in the Best Ideas Newsletter portfolio. We continue to be enormous fans of Mr. Buffett, Mr. Munger, and Berkshire Hathaway’s resilient business model and promising free cash flow growth outlook. On May 3, the first business day after Berkshire Hathaway reported its first quarter earnings, shares of BRK.A and BRK.B both moved higher during normal trading hours, a sign investors viewed the industrial conglomerate’s latest update quite favorably. We view Berkshire Hathaway as well-positioned to capitalize on the uneven but ongoing recovery in the US economy as COVID-19 vaccine distribution efforts are now in full swing (underpinning the domestic economy’s favorable outlook as quarantine measures and social distancing requirements are slowly eased across the country).

May 4, 2021

Video: Apple’s Cash Based Sources of Intrinsic Value and Dividend Health
Image Shown: Inside an Apple store. Source: Valuentum. Video shown: Valuentum's President Brian Nelson walks through Apple's financial statements to explain the cash-based sources of intrinsic value and how net cash on the balance sheet and future expected free cash flow are key sources of dividend health. This 10-minute video clip is part of a 3+ hour presentation on financial statement analysis provided in April 2021.

May 3, 2021

The Real Reasons Why Buffett Wants You in Index Funds
Image Shown: Since mid-June 2015, on a price-only basis, the S&P 500 (SPY) has nearly doubled, while shares of Kinder Morgan have nearly halved. In Morgan Housel’s book The Psychology of Money, chapter 16 leads in with “Beware taking financial cues from people playing a different game than you are.” The people on CNBC are playing a different game than you, and so is Warren Buffett. Buffett’s principles on stock selection are golden, but you must understand that he is near the top of the Forbes’ Billionaires List. He absolutely should be taking his own advice and indexing! With the threat of long-term inflation and price-agnostic trading, the average American, even with a few million in the bank, is not so lucky. Keep your game sharp.

Apr 30, 2021

High Yielding Philip Morris Boosts Guidance
Image Shown: Philip Morris International Inc has been steadily growing its alternative tobacco product sales during the past several years and its growth outlook on this front is quite bright. RRP stands for reduced-risk products according to Philip Morris. Image Source: Philip Morris International Inc – First Quarter of 2021 IR Earnings Presentation. Philip Morris is a high-yielding income generator with a promising growth outlook. Historically, the firm hasn't allocated a significant amount of capital (or any) towards share repurchases, highlighting management’s commitment to income seeking shareholders. Though we understand that some investors may shy away from the company due to ESG-related considerations, for those that do not have such investment restrictions, we continue to like Philip Morris as an idea in the High Yield Dividend Newsletter portfolio. We view its forward-looking dividend coverage quite favorably, though we would like for management to pare down the firm’s net debt load over the long haul. Recently, shares of PM have been on a nice upward climb indicating investors continue to warm up to Philip Morris’ promising free cash flow growth outlook, supported in part by its alternate tobacco products (and what they imply regarding long-term resiliency versus traditional cigarettes).

Apr 30, 2021

Dividend Increases/Decreases for the Week April 30
Let's take a look at companies that raised/lowered their dividend this week.

Apr 29, 2021

Best Idea Facebook Posts Blowout Earnings Report
Image Shown: Facebook Inc’s digital advertising business is a behemoth and enabled the firm to put up banner first quarter 2021 performance. We continue to be enormous fans of Facebook and include shares of FB as a top-weighted idea in our Best Ideas Newsletter portfolio. Image Source: Facebook Inc – First Quarter of 2021 IR Earnings Presentation. We continue to view Facebook as one of the most attractive capital appreciation opportunities out there as shares of FB, as of this writing, are trading at a steep discount to their intrinsic value on the basis of enterprise cash flow analysis. Our fair value estimate for Facebook sits at $413 per share with room for upside as the top end of our fair value estimate range sits at $516 per share. Facebook is included as a top-weighted idea in the Best Ideas Newsletter portfolio and more recently, shares of FB have begun to converge towards our fair value estimate. Momentum continues to shift in the right direction after Facebook published its first quarter 2021 earnings report on April 28, which saw shares of FB jump higher after the report went public as the firm easily surpassed consensus top- and bottom-line estimates.